Microhoo As Good As Done, But Is Search Ready For Consolidation?

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Yahoo released lackluster earnings Tuesday -- reporting a decline in revenue, but a slight increase in profit, compared with the prior year. Microsoft could follow suit on Thursday. Analysts and search industry executives don't expect this week's announcements from either company to change the imminent search agreement. The majority believe, for the most part, that it's already a done deal.

Search contributes a relatively small part to Microsoft's revenue, despite the $100 million investment in the marketing campaign to promote the new search engine Bing. Most profit for the Redmond, Wash. company is generated through software sales, but that could change.

While it's too late for Yahoo, better-than-expected earnings for Microsoft might give the company a boost -- but either way, Aaron Goldman, managing partner at advertising rep firm Connectual, thinks the "deal is inevitable."

Goldman says Yahoo has always been innovative in its approach to display with behavioral targeting and exchanges. But aside from a few nice products like Search Monkey, BOSS, and RAIS, Yahoo's search offering has been pretty stagnant. Yahoo CEO Carol Bartz has publicly declared many times that Yahoo is not a search company.

"Microsoft has done a great job recently developing new search technologies, such as the Bing launch and adCenter before that," Goldman says. "A Microhoo search platform would establish a serious long-term competitor to Google in search and bring much-needed scale to behavioral and retargeting programs."

The strongest asset working in Microsoft's favor is the "enormous" amount of money the company brings to the table. "If a deal does go through, it's going to be all about the money," says Kevin Lee, CEO at Didit. "Microsoft brings money in two ways: the money it will pay up front for a deal, and rev-share on any types of media that ultimately gets sold. Microsoft may even be willing to pay out an excess of 100% rev-share on search to get a deal done."

Bryan Wiener, CEO of digital communications agency 360i, believes that Yahoo relinquishing its ability to sell search and display together could cost the company its strongest selling point and key differentiator in the market.

Microsoft has been ramping up advertising services. For example, Content Ads -- a contextual advertising service in the U.S. launched in May 2009 -- offers a way for advertisers to target relevant ads to consumers across the Microsoft content network. It maps content within a news article on a site to keywords that advertisers have purchased.

Even more interesting than a potential Microhoo partnership is the reality that the two giants would consider consolidation, something that only happens in mature markets. It turns the product into a commodity -- and in some cases, prompts new entrants onto the market segment that can deliver lower, more competitive prices. Perhaps, in this case, competitive prices for paid search keywords or behavioral targeting for display ads.

Trip Chowdhry, managing director at Global Equities Research, believes search marketing has moved from innovation into commoditization, which prompts consolidation. "It's more about the price of clicks than the technology," he says. "How do you get the price of the click down? You commoditize search."

Commoditization consolidates the big players, so small companies can move in and start building out the industry. It happens in the telecommunications, the electronics and a variety of other tech industries. Perhaps now it's time for search.

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